Europe’s flagship carbon border tax, the Carbon Border Adjustment Mechanism (CBAM), is under growing political pressure from major EU member states and facing volatility in carbon markets as leaders debate its future, raising questions about the bloc’s industrial competitiveness and climate strategy.
Germany, Italy and the Czech Republic have urged revisions to the EU’s broader carbon pricing framework, including the Emissions Trading System (ETS) to which CBAM is linked, saying high carbon costs are harming energy‑intensive industries and contributing to elevated energy prices. The political push has sparked a sharp drop in EU carbon permit prices, with the benchmark EU carbon contract sliding to its lowest level since August, down about 7% to €73.08 per metric ton following comments from German Chancellor Friedrich Merz and others suggesting intervention or reform of the carbon market.
The CBAM, which came into its full operational phase on Jan. 1, 2026, requires importers of high‑emission goods such as steel, cement, aluminium, fertilisers and electricity to surrender carbon certificates reflecting the carbon content of those products, aligned with the EU ETS price. Designed to prevent “carbon leakage” — where production shifts to countries with weaker climate rules — the mechanism complements the ETS by equalising carbon costs between EU and non‑EU producers.
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European Commission President Ursula von der Leyen defended the ETS and related carbon pricing tools at an informal EU summit this week, saying they are central to financing clean technology investment and long‑term climate goals. The ETS has generated about €200 billion in revenues for EU governments since its launch, she said, and a formal review of the system is expected by mid‑2026.
Industry leaders have also heightened pressure on EU policymakers to cap or revise carbon costs to protect competitiveness. CEOs from major European companies including BASF, ArcelorMittal and Heidelberg Materials have warned that high energy prices — exacerbated by carbon costs — are eroding investment in the region and could prompt relocation to the United States and China where energy is cheaper. European industrial electricity prices remain more than twice those in the U.S. and China, according to industry groups, intensifying calls for policy adjustments.
Market participants said the political debate has injected uncertainty into carbon markets, which could dampen investment signals for clean energy and climate innovation. Analyst reactions to the price drop noted that while lower carbon prices ease costs for polluters, they can undermine incentives to decarbonise and impact utilities and renewable energy firms negatively.
Despite the pushback, EU negotiators in 2025 agreed a set of simplifications for CBAM rules that introduce a 50‑tonne de minimis threshold to exempt many small importers, while maintaining coverage of roughly 99% of embedded emissions in imported goods. The Council and European Parliament reached provisional agreement on these administrative simplifications to reduce compliance burdens without compromising climate goals.
Trade tensions persist, with some non‑EU exporters and governments characterising the mechanism as protectionist and discriminatory, though the bloc argues CBAM can encourage wider carbon pricing adoption globally. The dispute has featured in WTO complaints and trade talks, underscoring the broader implications of aligning environmental policy with international trade rules.
As formal ETS and CBAM reviews advance through EU institutions in the coming months, Brussels faces a delicate balancing act: maintaining credibility on climate commitments while addressing industrial competitiveness and market stability concerns.
